Arbitration and Conciliation Act, 1996: s.34 – Application for setting aside award – Scope of interference – Held: In an application under s.34, the court is not expected to act as an appellate court and re-appreciate the evidence – The scope of interference would be limited to grounds provided under s.34 of the Arbitration Act – The interference would be so warranted when the award is in violation of “public policy of India”, which has been held to mean “the fundamental policy of Indian law” – A judicial intervention on account of interfering on the merits of the award would not be permissible – However, the principles of natural justice as contained in s.18 and 34(2)(a)(iii) of the Arbitration Act would continue to be the grounds of challenge of an award – The ground for interference on the basis that the award is in conflict with justice or morality is now to be understood as a conflict with the “most basic notions of morality or justice” – It is only such arbitral awards that shock the conscience of the court, that can be set aside on the said ground – An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter – However, an illegality with regard to a mere erroneous application of law would not be a ground for interference – Equally, re-appreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award.
Arbitration and Conciliation Act, 1996: s.34 – Arbitral Tribunal passed the award in favour of SICAL holding that there was a change in law and thereby granting reliefs as prayed for by SICAL – It directed conversion of Container Terminal of TPT from royalty model to revenue share model – The finding of the Arbitral Tribunal was based on a premise that when TPT entered into a contract with SICAL there was an existing policy, which provided royalty to be factored into the cost while fixation of tariff and that subsequently, the GoI changed its policy on 29th July, 2003 thereby providing that royalty payment/revenue sharing will not be factored into/taken into account as cost for fixation/revision of tariff by TAMP; and that there was subsequent change in policy on 31st March, 2005 by which part of royalty was permitted to be factored into the cost – According to the Arbitral Tribunal, there was a change in policy, which amounted to change in law, which, in turn, adversely affected SICAL – Award of Arbitral Tribunal challenged by TPT before the District Judge – District Judge dismissed the s.34 petition – TPT successfully challenged before the High Court – Aggrieved SICAL filed instant appeals – Held: When the bid document was notified and when SICAL submitted its bid and LoI was issued to it, there were no guidelines in vogue – Even the guidelines of February 1998 do not provide for royalty being factored as cost while fixation of tariff – On the contrary, the tariff order of 1999 specifically clarifies that it has left the royalty issue to be decided by TPT and the GoI – It has specifically clarified that the approval by TAMP should not be interpreted to be amounting to any implicit approval of royalty-related issue – Further, the tariff order issued on 20 th September, 2002 specifically rejects the claim of SICAL for factoring any royalty as cost while tariff/price fixation – SICAL has challenged the said order before the High Court by way of writ petition, which petition has been allowed – It is also not in dispute, that on account of interim order passed by the High Court dated 8th November, 2002, SICAL is still continuing to charge at rates notified in the 1999 tariff order – In this scenario, the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, is a finding based on ‘no evidence’ – Had the Arbitral Tribunal perused the tariff orders of 1999 and 2002, it would have found that in the 1999 tariff order TAMP has specifically observed that its approval of the tariff should not be construed as its implicit approval of royalty-related issue and the 2002 tariff order specifically states that royalty was not permitted to be factored in the cost while determining tariff – The Arbitral Tribunal has totally failed to take into consideration this aspect of the matter – As such, since the finding of the Arbitral Tribunal, that there was an existing law to the effect that the royalty payable shall be permitted as a pass-through in cost while fixation of tariff, is based on ‘no evidence’ and the finding, that there was a change in law in 2003 and 2005 is based on without taking into consideration the relevant evidence, would come in the realm of perversity as explained by this Court in paragraph 31 of the Associate Builders – The findings are based on ‘no evidence’ and ‘ignorance of vital evidence’ in arriving at its decision. Arbitration and Conciliation Act, 1996: s.34 – Whether the Arbitral Tribunal was justified in passing an award thereby substituting ‘royalty payment module’ to the ‘revenue-sharing module’ – A contract duly entered into between the parties cannot be substituted unilaterally without the consent of the parties – The intention of the parties could be gathered from the documents on record – SICAL made representation to TPT seeking a relief under the terms of Article 14.3 of the Agreement – TPT informed SICAL that the issues raised by it were under examination – However, TPT refused to consider SICAL’s application for relief since, according to it, the issue raised by SICAL was pending before the High Court – SICAL filed writ petition before High Court – High Court allowed the writ petition clarifying that the petition pending before the High Court had nothing to do with the representation under Article 14 of the License Agreement and remanded the matter to TPT for consideration afresh – TPT rejected the claim of SICAL – TPT has specifically observed that any change in the Agreement cannot be done without prior approval of the GoI – SICAL wrote to TPT invoking arbitration under Article 15.3 of the License Agreement – TPT strenuously contested the claim of SICAL with regard to prayer for change from ‘royalty payment mode’ to ‘revenue sharing mode’ – It could, thus, be seen that SICAL wanted the Agreement to be amended so as to change the ‘royalty payment method’ to ‘revenuesharing method’ – TPT was always opposed to it – The intention of TPT is apparent from its various communications and its stand before the Arbitral Tribunal, that it was not agreeable for amendment of the Agreement from ‘royalty payment method’ to ‘revenue-sharing method’ – However, ignoring the stand of TPT, by the impugned Award, the Arbitral Tribunal has thrust upon a new term in the Agreement between the parties against the wishes of TPT – The ‘royalty payment method’ has been totally substituted by the Arbitral Tribunal, with the ‘revenue-sharing method’ – It is thus clear, that the Award has created a new contract for the parties by unilateral intention of SICAL as against the intention of TPT.
Arbitration: An Arbitral Tribunal is not a Court of law – Its orders are not judicial orders – Its functions are not judicial functions – It cannot exercise its powers ex debito justitiae.
Dismissing the appeals, the Court
HELD : 1. The scope of interference would be limited to grounds provided under Section 34 of the Arbitration Act. An award would be set aside on the ground of patent illegality appearing on the face of the award and as such, which goes to the roots of the matter. However, an illegality with regard to a mere erroneous application of law would not be a ground for interference. Equally, re-appreciation of evidence would not be permissible on the ground of patent illegality appearing on the face of the award. A decision which is perverse, though would not be a ground for challenge under “public policy of India”, would certainly amount to a patent illegality appearing on the face of the award. However, a finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality. [Paras 42, 43][434-H; 435-C-E]
2. Article 14 of the bid document deals with ‘change in law’. Article 14.3 provides for relief under change in law. If, after the date of Agreement, there is a change in the law which substantially and adversely affects the rights of the Licensee under the Agreement so as to alter the commercial viability of the project, the Licensee may, by written notice, request amendments to the terms of the Agreement. It further provided, that subject to provisions of Article 14.3, the Licensee shall not be entitled to any compensation whatsoever from the Licensor as a result of change in law. [Para 55][442-G-H; 443-B-C]
MMTC Limited v. Vedanta Limited (2019) 4 SCC 163: [2019] 3 SCR 1023 – relied on.
3.1 Neither under Section 34 nor under Section 37 of the Arbitration Act, the Court is entitled to reappreciate the evidence. The said limitation would be equally applicable to this Court also. Admittedly, the bid document was published on 9th April, 1997. The technical bid of SICAL was submitted on 24th October, 1997. The financial offer of SICAL was submitted on 19th December, 1997. LoI was issued on 29th January, 1998. All this has happened prior to the guidelines issued by TAMP in February 1998. As such, it is beyond any doubt, that when the bid document was notified and when SICAL submitted its bid and LoI was issued to it, there were no guidelines in vogue. For the first time, the guidelines were adopted by TAMP in the workshop held in Chennai on 26th/27th February, 1998. [Para 60][444-C-F]
3.2 Even 1998 guidelines do not mention, that the royalty could be factored in the cost while determining the tariff. Though the said guidelines observed, that the port pricing may continue to be cost-based with an assured rate of return, it further observed, that such a concept of an assured rate of return is not in consonance with a competitive system. Thus, it is amply clear, that when the bids were invited, and SICAL submitted its bid and LoI was issued to it, there was no policy at all. Even the 1998 guidelines do not provide for factoring the royalty in cost while determining the tariff. [Para 63][445-G-H; 446-A]
4. A conjoint reading of all documents would reveal that when the bid document was published in April 1997; SICAL tendered its bid in October, 1997 and submitted its financial offer in December,1997; and the LoI was issued to SICAL on 29 th January, 1998, there were no guidelines at all. Even the guidelines of February 1998 do not provide for royalty being factored as cost while fixation of tariff. On the contrary, the tariff order of 1999 specifically clarifies that it has left the royalty issue to be decided by TPT and the GoI. It has specifically clarified that the approval by TAMP should not be interpreted to be amounting to any implicit approval of royalty-related issue. Further, the tariff order issued on 20th September, 2002specifically rejects the claim of SICAL for factoring any royalty as cost while tariff/price fixation. SICAL has challenged the said order before the Madras High Court by way of writ petition, which petition has been allowed. It is also not in dispute, that on account of interim order passed by the Madras High Court dated 8th November, 2002, SICAL is still continuing to charge at rates notified in the 1999 tariff order. [Para 76][451-A-D]
5.1 In this scenario, the finding of the Arbitral Tribunal, that there was a law when the Agreement was entered into between the parties, which provided royalty as a pass-through and that the said law has been changed for the first time in 2003 and subsequently again changed in 2005, is a finding based on ‘no evidence’. Had the Arbitral Tribunal perused the tariff orders of 1999 and 2002, it would have found that in the 1999 tariff order TAMP has specifically observed that its approval of the tariff should not be construed as its implicit approval of royalty-related issue and the 2002 tariff order specifically states that royalty was not permitted to be factored in the cost while determining tariff. The Arbitral Tribunal has totally failed to take into consideration this aspect of the matter. [Para 77][451-D-F]
6.2 As such, since the finding of the Arbitral Tribunal, that there was an existing law to the effect that the royalty payable shall be permitted as a pass-through in cost while fixation of tariff, is based on ‘no evidence’ and the finding, that there was a change in law in 2003 and 2005 is based on without taking into consideration the relevant evidence, would come in the realm of perversity as explained by this Court in paragraph 31 of the Associate Builders. The findings are based on ‘no evidence’ and ‘ignorance of vital evidence’ in arriving at its decision. [Para 78][451-F-H]
Associate Builders v. Delhi Development Authority (2015) 3 SCC 49 : [2014] 13 SCR 895 – relied on.
7.1 This brings us to the next issue viz., as to whether the Arbitral Tribunal was justified in passing an award thereby substituting ‘royalty payment module’ to the ‘revenue-sharing module’. A contract duly entered into between the parties cannot be substituted unilaterally without the consent of the parties. The intention of the parties could be gathered from the documents on record. SICAL, for the first time, made representation to TPT on 6th October, 2006 thereby seeking a relief under the terms of Article 14.3 of the Agreement. On 14 th October, 2006, TPT informed SICAL that the issues raised by it were under examination. However, vide order dated 27th October, 2006, TPT refused to consider SICAL’s application for relief since, according to it, the issue raised by SICAL was pending before the Madras High Court. SICAL therefore filed writ petition being Writ Petition No. 4361 of 2006 before the Madras High Court. The Madras High Court allowed the said writ petition vide order dated 21st August, 2007 clarifying that the petition pending before the High Court had nothing to do with the representation under Article 14 of the License Agreement and remanded the matter to TPT for consideration afresh. Vide a reasoned letter dated 25th April, 2008, TPT rejected the claim of SICAL. TPT has specifically observed that any change in the Agreement cannot be done without prior approval of the GoI. SICAL on 19th November, 2012 addressed a letter to TPT invoking arbitration under Article 15.3 of the License Agreement. TPT strenuously contested the claim of SICAL with regard to prayer for change from ‘royalty payment mode’ to ‘revenue sharing mode’. [Para 79][452-A-E]
7.2 It could thus be seen, that SICAL wanted the Agreement to be amended so as to change the ‘royalty payment method’ to ‘revenue-sharing method’. TPT was always opposed to it. The intention of TPT is apparent from its various communications and its stand before the Arbitral Tribunal, that it was not agreeable for amendment of the Agreement from ‘royalty payment method’ to ‘revenue-sharing method’. [Para 80][453-E-F]
7.3 However, ignoring the stand of TPT, by the impugned Award, the Arbitral Tribunal has thrust upon a new term in the Agreement between the parties against the wishes of TPT. The ‘royalty payment method’ has been totally substituted by the Arbitral Tribunal, with the ‘revenue-sharing method’. It is thus clear, that the Award has created a new contract for the parties by unilateral intention of SICAL as against the intention of TPT. [Para 81][453-G]
Ssangyong Engineering and Construction Company Limited v. National Highway Authority of India (NHAI) (2019) 15 SCC 131 : [2019] 7 SCR 522 – relied on.
8. An Arbitral Tribunal is not a Court of law. Its orders are not judicial orders. Its functions are not judicial functions. It cannot exercise its powers ex debito justitiae. It has been held that the jurisdiction of the arbitrator being confined to the four corners of the agreement, he can only pass such an order which may be the subject-matter of reference.The impugned Award would come under the realm of ‘patent illegality’ and therefore, has been rightly set aside by the High Court. [Paras 87, 88] [456-A-C]
Bharat Coking Coal Ltd. v. Annapurna Construction (2003) 8 SCC 154 : [2003] 3 Suppl. SCR 122; Md. Army Welfare Housing Organization v. Sumangal
Services (P) Ltd. (2004) 9 SCC 619 : [2003] 4 Suppl. SCR 385 – relied on.
State of Jharkhand and Others v. HSS Integrated SDN and Another (2019) 9 SCC 798; Sumitomo Heavy
Industries Limited v. Oil and Natural Gas Corporation Limited (2010) 11 SCC 296 : [2010] 9 SCR 176; Kwality Manufacturing Corporation v. Central Warehouse Corporation (2009) 5 SCC 142; Rashtriya Ispat Nigam Limited v. Dewan Chand Ram Saran (2012) 5 SCC 306 : [2012] 4 SCR 1; Steel Authority of India Limited v. Gupta Brother Steel Tubes Limited (2009) 10 SCC 63 : [2009] 14 SCR 253; Pure Helium India (P) Limited v. Oil and Natural Gas Corporation Limited (2003) 8 SCC
593 : [2003] 4 Suppl. SCR 561; P.V. Subba Naidu and Others v. Government of A.P. and Others (1998) 9 SCC 407; Dhannalal v. Kalawati Bai and Others (2002) 6 SCC 16 : [2002] 1 Suppl. SCR 19; Swamy Atmananda and Others v. Shri Ramakrishna Tapovanam and Others (2005) 10 SCC 51 : [2005] 3 SCR 556; Transcore v. Union of India and Another (2008) 1 SCC 125 : [2006]
9 Suppl. SCR 785; Sandvik Asia Private Limited v. Vardhman Promoters 2007 (94) DRJ 762; Hansalaya Properties v. Dalmia Cement (Bharat) Limited 2008
(106) DRJ 820; Adani Power (Mundra) Limited v. Gujarat Electricity Regulatory Commission and Others (2019) 19 SCC 9; Raghunathrao Ganpatrao v. Union of India (1994) 1 SCC Supp 191 : [1993] 1 SCR 480; Nagubai Ammal and Others v. B. Shama and Others [1956] SCR 451; Suresh Kumar Wadhwa v. State of Madhya Pradesh and Others (2017) 16 SCC 757 :
[2017] 14 SCR 1; All India Power Engineer Federation and Others v. Sasan Power Limited and Others (2017)
1 SCC 487 : [2016] 9 SCR 901; Rashtriya Chemicals and Fertilizers Limited v. Chowgule Brothers and Others (2010) 8 SCC 563 : [2010] 7 SCR 962; South East Asia Marine Engineering and Constructions Limited v. Oil India Limited (2020) 5 SCC 164; J.G. Engineers Private Limited v. Union of India and Another (2011) 5 SCC 758 : [2011] 8 SCR 486; Satyanarayana
Construction Company v. Union of India and Others (2011) 15 SCC 101 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
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